Intellectual property taxation in Italy

Qualifying taxpayers

• Resident companies
• Domestic permanent establishments (“PEs”) of foreign companies
• Foreign PEs of resident companies subject to tax in the jurisdiction providing benefits
• Individuals operating enterprises

• Italian tax resident companies
• Italian PEs of foreign companies resident in a State that has a tax treaty in force with Italy and allows an effective exchange of information
• Individual entrepreneurs 

Qualifying IP

• Patents ;
• Equivalent rights: utility models (e.g. “petty patents”, “innovation patents”, “short term patents”), IP assets that grant protection to plants and genetic material, orphan drug designations, and extensions of patent protection ;
• Software protected by copyright ;
• Non-patented assets owned by SMEs- certified as obvious, useful and novel such by a competent government agency independent from the tax administration, for taxpayers that have no more than EUR 50 in global group-wide turnover and that do not earn more than EUR 7.5 million per year in gross revenues from all IP assets, on average over a five-year period (SMEs)

• Patents (granted or in the course of being granted by the Italian or EU Patent Office; equivalent foreign patents)
• Equivalent rights: supplementary protection certificates, utility models, plant protection rights, topographies of semiconductor products, and the like
• Software protected by copyright
• Designs and models that can be legally protected
• Know-how (defined as processes, formulas and information related to industrial, commercial or scientific experiences) that can be legally protected
• Any combination of two or more or the above IP assets which are jointly used in the realization of a product or process

Modified nexus approach (or other approach)

• Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Jurisdictions could treat the nexus ratio as a rebuttable presumption 

• Qualifying income = [(Qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Not rebuttable presumption

Determination of the uplift

• 30% of qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

• 30% of the qualifying expenditure capped to the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing

Qualifying expenditure

• Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure for general and speculative R&D taken into account on a pro rata basis
• Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
• Cumulative approach i.e. expenditure incurred all over the life of the IP asset

• Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
• Cumulative approach limited to expenditure incurred starting from 2015 

Person carrying on the R&D and the place where the R&D is carried on

R&D carried out by:

• the IP owner (including by a foreign PE provided that it is operating at the time the IP income is earned)
• unrelated parties (outsourcing) irrespective of their location; jurisdictions may narrow the scope scope to certain types of unrelated parties and provide for a cap of unrelated party outsourcing expenditure; jurisdictions outside the EU could include R&D activities undertaken by resident related parties 

R&D carried out irrespective of the location by:

• the taxpayer itself (including for its share of costs in a cost contribution arrangement)
• outsourced to universities, independent research centres or other similar institutions
• unrelated parties (including when the cost is re-charged by a related party)
• related party: never

Overall expenditure

• Qualifying expenditure
• + IP asset acquisition costs : include expenditure incurred to obtain rights to research and, in the case of licensing: royalties and license fees (cumulative approach); jurisdictions outside the EU could include R&D expenditure incurred prior to acquisition in case of acquisition of a taxpayer that incurred R&D expenditure in the jurisdiction
• + expenditure for related-party outsourcing (cumulative approach)

• Qualifying expenditure
• Outsourced expenditure from related companies
• Acquisition costs 

Eligible income

• May include royalties, capital gains and other income from the sale of an IP asset, and embedded IP income from the sale of products and the use of processes directly related to the IP asset

• Royalty income;
• Profit arising from the sale of IP assets provided that at least 90% of the sale proceeds are reinvested in R&D activities on other qualifying IP assets within 2 years
• Profit from embedded IP
• Profit from IP infringement and other compensation

Overall income

• Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
• Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis 

• Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
• Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis
• Official guidance refers to the OECD TP Guidelines as to the methodologies to determine income attributable to the IP (CUP and RSP methods are the most used in practice)

Relief mechanism

• Exemption (implicit), or
• preferential tax rate

50% exemption of the eligible income

Cost of the entry into the box

• No indication

No

Effective tax rate

n/a

13,95%

(24% CIT + 3,9% Regional Tax) * 50%

Administrative

• Tracking of expenditure, IP assets and income; jurisdictions may allow tracking by products or families of products arising from IP assets if in line with business model
• Documentation requirements 

• The election for the Patent Box regime is effective for 5 five years and can be renewed for other 5-year periods
• Tracking must be done for each IP asset and properly documented

Other special features of the regime

• Jurisdictions may as a transitional measure allow taxpayers to calculate the nexus ratio based on a 3 or 5-year rolling average
• Jurisdictions may provide for grandfathering rules

• Taxpayers can directly determine the eligible income, provided that they comply with specific documentation requirements
  • Compliance with the documentation requirements allows penalty protection in case of adjustment by the tax authorities
• Alternatively, taxpayers can opt for an advance ruling procedure aimed at the determination of the eligible income
• Grandfathering rule:
  • trademarks could be included among the qualifying IP assets if the election was made until Dec. 31, 2016, but the election cannot be renewed at the end of the first 5-year period and, in any case, is not effective beyond June 30, 2021
  • Exchange of information